Testing for a Level Effect in Short-Term Interest Rates

Ólan Henry and Sandy Suardi

No 924, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: There is an extensive theoretical and empirical literature discussing the link between short-term interest rate volatility and interest rate levels. We present an LM based test for the presence of a level effect which is robust to the presence of unidentified nuisance parameter under the null of no level effect. We provide extensive Monte-Carlo evidence on the performance of this test under various DGPs. When applied to data on the 3-month US Treasury Bills rate, the test reports significant evidence of a level effect.

Keywords: Level Effects; LM Tests; Davies Problem (search for similar items in EconPapers)
JEL-codes: C12 E44 G12 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2004
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Citations: View citations in EconPapers (6)

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